Article
The wind has changed on the Swiss real estate market. Tenants and owners are facing rising costs while real estate assets are losing its appeal for investors. Rising interest rates have ended the property super-cycle.
April 28, 2023
"Unlike in other countries, however, the Swiss real estate market is only going through a process of normalization; it could even be termed a soft landing. But higher interest rates pose a major challenge. In the future, price corrections can be expected for both residential property and income-producing residential real estate. These should be manageable, however, thanks to the positive trends on the consumer markets."Fredy Hasenmaile, Responsable Real Estate Economics
Real estate is no longer the obvious investment choice after global central banks started raising rates in earnest in 2022. The yield differential of real estate assets against ten-year Swiss government bonds has fallen sharply and is currently below the long-term average. Depending on an investor's inflation expectations, however, the decline in the real yield differential is less significant. Some sleeves of real estate like residential properties offer partial protection against inflation while other sub asset classes like commercial properties can offer more.
Right now, there’s a balancing act in the market when it comes to valuations. Rising discount rates are expected to become the new reality in 2023, which adds pressure on the valuations of investment properties. Yet, valuations can better withstand this pressure if net rental income also increases. The prospects are particularly good for income-producing residential property here given that the shortage of rental housing characterizing the market is already reflected in the asking rents, which are increasing significantly.
This market development is also reflected in the portfolios of institutional investors, where loss of rental income, largely due to vacancy rates, has halved within just three years (Fig. 1). Thanks to a rise in the Swiss reference interest rate, which we expect for the first time in June, some of the rising borrowing costs and inflation can be passed on to tenants. The latter should be able to shoulder these additional costs relatively well thanks to the exceptionally strong labor market. In this respect, Switzerland's economic stability and the positive performance on the consumer markets are protecting real estate investments from a hard landing – and we remain positive on the asset class.
Sharp fall in vacancies, better income prospects
Demand for rental housing has regained some momentum over the past year, partly because renting is now cheaper than buying again. However, the decisive factor in the increased demand for rental housing was net immigration – which is at the highest level in eight years. Given the pronounced shortage of skilled workers, high immigration figures are also likely to be seen in the next few years and rental housing will therefore remain in demand in 2023 despite a slump in the economy.
The supply side paints a different picture. Construction activity in the rental housing segment continues to decline. A turnaround is still not foreseeable here and not enough housing is being built in the majority of regions. The brisk fall in supply and the fact that listing periods are quickly becoming shorter clearly signal that the rental housing market is turning into a landlord's market. In addition, given the interest rate reversal and high construction prices, an imminent revival in construction activity has become even less likely. As a result, vacancy rates will continue to fall at a similar rate in 2023, while rents are likely to rise sharply.
How will interest rate changes affect the real estate market in Switzerland? Is it still worth buying a property these days? Or is renting cheaper now? The Credit Suisse 2023 real estate study takes a look at Switzerland's real estate market.
The Swiss rental housing market saw a turnaround in record time. Instead of oversupply, there is already talk of a looming shortage of residential space far beyond the downtown areas. The main reason for this trend reversal is construction activity, which has been declining since 2017. We consider the revision of spatial planning to be the main cause of this. The revised spatial planning law makes it difficult to zone the land, as voters have repeatedly opposed further urban sprawl in Switzerland. As a result, building zone reserves are falling across Switzerland (Fig. 2). Densification, which was intended to provide sufficient housing supply as an alternative to zoning, is being slowed down across the board. Excessive planning objection possibilities, unresolved conflicting objectives between densification on the one hand and heritage/noise protection on the other, as well as lengthy approval processes, are blocking construction activity everywhere. Accompanying measures that could effectively support densification are either lacking or take too long to have an impact. Rapid action would be needed to avoid a full-blown housing shortage. However, this would require legislative changes, and even in the best-case scenario it would probably take years for them to alleviate the situation.
The looming housing shortage will inevitably lead to social tensions and is likely to generate strong backing for calls for even tighter regulation of the housing market in line with the Geneva and Basel models, although the corresponding restrictions will only make the problem even more acute.
Decline in building zone reserves across the board
Amid these cross currents, investors are demanding increasingly precise information on the sustainability of their real estate investments. The trend in sustainability reporting is therefore currently moving toward direct disclosure of key environmental figures, such as energy consumption or greenhouse gas emissions. Last year, it became either mandatory or at least recommended for members of AMAS (Asset Management Association Switzerland) and KGAST (Conference of Investment Foundation Managers) to publish the most important key figures in the annual reports of real estate funds and real estate investment foundations with closing date from the end of 2023. However, calculating these figures is far from simple. Results can vary for a property depending on the calculation method applied, making standardization a necessity. The non-profit association REIDA (Real Estate Investment Data Association) has taken on this task and developed a standard for determining the most important environmental key figures in the real estate sector. Uniform benchmarking in accordance with this REIDA standard took place for the first time in 2022. It involved 3,984 existing properties (36 real estate portfolios) with a total energy-consuming floorspace of almost 23 million m2. The new reporting standard enables interesting comparisons and allows conclusions to be drawn about which measures provide the most profitable way to arrive at net zero.
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